Is This What They Mean by Stock Market Volatility?
By Ralph Smith
Wednesday, February 28, 2007
The dramatic change in stock market prices yesterday is a demonstration of stock market volatility. The headlines are filled with stories about the leading stock market index dropping over 400 points in one day. That certainly qualifies as volatility.
So how do TSP investors react after yesterday's dramatic drop in stock prices and how has the stock market volatility impacted your investment.
First, if you have not done so, review your investment allocation. Do you have too much money in stocks?
If you happened to have $100,000 in the C fund early on Monday morning, how much did you have in the fund at the close of the stock market on Tuesday? You would still have about $96,500. So you lost about $3500 in one day. That is probably as much as you would spend for one person on a luxury cruise to the Caribbean during the winter months and more than you would spend during a morning stroll to get a latte at Starbucks every morning for two or three years.
But, if you had $100,000 in the C fund on Monday morning, how much did you have in the fund as of February 1st? Assuming you have not put any more money into the fund, or take any money out of the fund during the month, the change is not that dramatic. Your investment is down about 3% for the month after the stock market closed on Tuesday afternoon.
And how about the I fund? Investors in the I fund have made considerable profits over the past several years. After Tuesday's dramatic drop in stock prices, and the I fund went down considerably in one day, you are stiill slightly ahead of where you were on February 1st. Even better, your TSP I fund stock price is still up about 23 cents per share from January 1, 2007 - February 27, 2007.
And the S fund? Shares of the S fund stood at $18.76 on January 1, 2007. At the close of business on February 27th, the S fund shares stood at $19.24--despite a drop of 65 cents per share in one day. (Check out the daily TSP rate charts for information on share prices for all TSP funds.)
Second, keep in mind that panic selling is not usually a good move. Now is not the time to panic.
But, keep in mind, that when the stock market falls as it did yesterday, it does not mean that the drop in prices is over. There is a good chance that stock prices will go up today or this morning and then fall another 3 or 4 percent in the coming days or weeks. When you look at your retirement investment, consider your allocation from that perspective.
Ask yourself this question and answer it honestly: How will you feel if your C fund goes down an additional 4% in a short time?
Investors in the TSP G fund and the F fund have not fared well in recent years compared to those investors who have put their money into stocks. But, when the stock market fell 3% in one day, the shares of the G fund did not change. Investors in the G fund did not lose a penny. And, even better, investors in the F fund saw the value of their shares go up 5 cents on a day when the C fund dropped by 55 cents per share.
There are many financial advisors who will tell anyone willing to listen (or who will pay for the advice) how to invest their retirement funds. It is certainly possible there is an advisor or two out there who told his clients that the stock market will drop 3% in one day this week so investors should sell their stocks on Monday and put there investments into bonds. So far, anyone who made such a prediction is not hitting the airwaves telling investors how to take advantage of this prognostic capabity.
No one can predict that the stock market computer system will have a malfunction or that human error may add to the fall in stock prices which will crush your investment funds--just as no one predicted that terrorists would fly airliners into the World Trade Center or the Pentagon in one day.
Stock prices have gone up over time and will almost certainly continue to do so. But investing your retirement funds is your responsibility. If your stock market funds you are counting on for your retirement drop 10 or 20 percent in a year, can you still afford retirement? If you are a federal employee with another decade or more before you want to dip into the funds, the stock market ups and downs are likely to work in your favor as the gains will probably exceed the losses--perhaps by a considerable margin based on historical returns. But, if you are one of the large number of federal employees who wants to walk out the door of your federal office in the next year or two, the "downs" of the stock market could exceed the "ups" during this relatively short time frame and put you at a financial disadvantage.
Our advice: Don't panic over short-term market trends. Keep your long-term goals in mind. Don't ignore your TSP investment allocation. Don't put all of your retirement eggs in one basket. Be thankful that you have access to one of the best retirement programs in America.
© 2008 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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